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2.6.2020

Should I Buy or Rent Office Space?

For commercial real estate tenants, the age-old question of whether to buy or rent office space actually has more than one answer. The “right” call for one company might be the wrong fit for another—and the smart move one year might look less savvy the next, depending on a range of different economic and industry factors.

With that in mind, here are some of the key considerations that decision-makers responsible for making buy-or-rent decisions should be weighing:

Market conditions

Rent or buy decision-making is clearly influenced by current market conditions. Buying real estate in the current market, for example, simply isn’t feasible (or sensible) for many companies. As important as it is to understand current market dynamics, it’s also critical to take a step back and consider that information in context: think about where we are in the larger economic cycle. Are you comfortable diving in at the top of the market, or do you want to try and be more opportunistic?

A mirror and a crystal ball

Making the right rent or buy decision isn’t just about understanding the market—it’s about understanding yourself. Companies weighing this decision need to think critically about what the next 5-10 years of their own corporate future could look like. What are your goals? Where are you going? How are you growing? The right fit today could look very different in a few short years. Liquidity needs should also be factored in. Real estate is an inherently illiquid asset. Consider any commercial real estate investment in the context of both your short- and your long-term liquidity needs.

Sticker shock

The cost of construction is the 500-pound gorilla in the room, affecting both buyers and renters. Construction costs have risen 20-30% in recent years, changing the decision-making calculus in important ways. Potential buyers have to consider whether they can afford to improve a new acquisition to the point where it accommodates their needs. On the tenant side, landlords are understandably reluctant to pay out of pocket to cover the higher costs of building out a space. There are owners and operators out there right now not doing rental deals because the cost of construction has simply become prohibitive.

Splitting the difference

A competitive real estate landscape and the rising cost of construction has also increased the urgency for investors and owners to look for creative solutions. That’s almost certainly why one such solution, net leasing, is an increasingly popular alternative for many companies. Net leasing offers the best of both worlds, allowing some owners to sell at maximum value and essentially become a tenant in their own building. For some, it’s a great way to not only find the right professional space, but free up capital and potentially invest in new opportunities.

Regardless of a company’s specific financial and professional circumstances, any business weighing the costs and benefits of buying versus selling should consult a trusted commercial real estate expert to ensure that they are making an informed decision. The right professional partners can walk you through the different scenarios, give you the information and context you need to accurately weigh the costs and benefits of each scenario, and work closely with experts who are able to combine local market knowledge with important insights about the impact of the larger economic and commercial real estate picture.

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